Researchers from Victoria University argue that Australia shouldn’t lift the superannuation guarantee (SG) from 9.5% to to 12% because it would: 1) reduce take-home pay and further push-up household debt, because it diverts households from directly equity-financing home ownership; and 2) it would hamper macroeconomic recovery by damping spending and raising short-run labour costs:
In a study with colleagues from Victoria University’s Centre of Policy Studies published in the Journal of Policy Modeling we examined the effects of such an increase on financial stability.
We found it could have adverse impacts on two indicators of economy-wide debt: the ratio of private debt to income, and the ratio of debt to equity in housing finance.
These indicators matter for stability. High debt levels tend to amplify what would otherwise be manageable economic shocks.
Ultimately paid by households
How would an increase in compulsory super contributions increase debt?
The increase will ultimately be borne by households through a matching reduction in take-home pay. How long this takes will depend on how far in advance the planned increases have been announced and on broader labour market conditions.
Regardless, the end point will be that the extra superannuation will come from employees through lower take-home pay than they would have had…
A rise in compulsory super has little direct impact on demand for housing as shelter, whether by owner-occupiers or renters. But it does affect the way housing is financed…
Shovelling more household savings into super and less into home equity will at the margin cut the amounts households are able to advance as deposits for homes and increase the amounts banks are able to lend them on top of those deposits…
As noted earlier, for households with low saving rates the increase in compulsory super will be accommodated by lower spending than would have been expected.
During a recession this constitutes an additional risk to recovery.
It is also worth noting that while the legislated increase in compulsory contributions will ultimately be borne by workers through lower take-home pay than otherwise, in the short-run some of it might be borne by firms.
The risk there is that by pushing up short-run hiring costs, the increase in compulsory super will delay the labour market recovery.
From the outset MB has argued against lifting the SG to 12% for the following reasons:
- It would lower workers’ take-home pay, hitting lower-income earners especially hard.
- It would increase inequality, given the lion’s share of concessions flow to high income earners.
- It would worsen the long-term sustainability of the Budget, since the cost of superannuation concessions outweighs the benefits from lower pension outlays.
In reality, Australia’s superannuation system works more as a tax avoidance scheme for the rich than a genuine retirement pillar.
The only real beneficiaries from lifting the SG to 12% are superannuation funds, which would get to earn fatter management fees at the expense of both Australian workers and taxpayers.